Fears super reforms could hurt start-up investment

Though introduced to increase transparency about how super funds invest nearly $1.6 trillion worth of retirement savings, start-ups said the reforms could push away companies afraid of seeing their value published online during early investment stages.
Photo-illustration: Dorothy Woodgate

Technology start-ups and investors have warned that incoming rules forcing superannuation funds to publish the valuation of investments could push funds out of local and foreign venture capital.

The reforms, introduced under the previous federal government and due to come into effect on July 1, would require super funds to disclose the value of each investment they make directly, or through collective groups.

Though introduced to increase transparency about how super funds invest nearly $1.6 trillion worth of retirement savings, the reforms, start-ups said, could push away companies afraid of seeing their value published online during early investment stages. “We shouldn’t be enacting policy that has the unintended, I’m sure, consequence of publishing what should be confidential information," said
Sam Chandler
, chief executive of Adobe rival Nitro, which he started in Australia but has since moved to San Francisco.

“Valuing early stage companies is part art, part science ... if any prospective investor knew exactly what the valuation history looked like for a particular company, it would have some pretty serious implications. It would allow anyone who was seriously thinking about investing in that company or competing with that company to see the value of a privately held company."

Valuation may be astray

The move could also place an artificial valuation on companies as super funds write up or down their internal asset as part of a wider portfolio.

Online footwear retailer Shoes of Prey has taken investment from MLC as part of the $4.25 million it has raised to date. Co-founder
Jodie Fox
said she supported start-ups disclosing their own values but pushed against allowing similar disclosure by super funds.

“[Super funds] have their own set of priorities by which they might write that value up or down on any given day," she said. “That’s a real problem because it’s not reflective of the price that was negotiated for the valuation or the stock. We see a lot of people going offshore because the valuation numbers and the speed of raising capital is faster [in Silicon Valley].

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Silicon Valley companies often trumpet their valuations following investment rounds, leading to eye-popping headlines like Airbnb’s recent push for a $US10 billion valuation – but Australian technology entrepreneurs are more cagey about how much their private companies are worth.

Lid on big investments

Even some of the industry’s largest recent investments, such as the $US60 million raised by Atlassian in 2010 or BigCommerce’s $US40 million last year, do not reveal what stake investors bought in the company, keeping the actual value of the company at that stage private. Blackbird VC partner
Rick Baker
, a former venture capital portfolio manager at MLC, said super funds had been turned off venture capital in Australia after seeing poor returns during the dot-com bubble of the late 1990s, and investments made before the global financial crisis.

But he said attempts to reignite interest in super investment could be hampered by the laws, which would push start-ups to choose venture capital funds or individual investors who are not associated with a super fund.

“In the last four years there haven’t been any material cheques [in technology start-ups] written by Australian super," he said. “At the moment there’s a big blocker between super and the start-up community and that’s that venture capital is in such disarray. The side effects of these new disclosure laws are effectively firming up that barrier."

University of California ostracised

In a submission to the federal government, the Australian Private Equity & Venture Capital Association pointed to a case in the United States during 2003 in which top venture capital firms cut ties with the University of California after it was forced by the courts to disclose the value of its investments through the funds. It warned the laws as they stood could have a similar effect in Australia and the US, where local super funds have invested previously.

“We have already observed at least one superannuation fund in recent months which was unable to invest in a sought-after, top-tier foreign PE fund solely on the basis of the impending look through disclosure obligations, thus missing out on a potentially attractive investment," the association said.

Ned Moorfield
, co-founder of taxi booking company goCatch, said the reforms could complicate the process of raising capital.

A spokeswoman for Finance Minister
Mathias Cormann
said the government was considering submissions received as part of a public consultation on the disclosure and governance rules surrounding superannuation reforms.

“Super funds should be a really important part of our ecosystem and they’re not – a criminally small amount of super money flows into venture capitals, and it’s a [$1.6 trillion] pool of money," Mr Chandler said.